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Author

Joel Shapiro

Other affiliations: Pompeu Fabra University
Bio: Joel Shapiro is an academic researcher from University of Oxford. The author has contributed to research in topics: Credit rating & Structured finance. The author has an hindex of 17, co-authored 52 publications receiving 2993 citations. Previous affiliations of Joel Shapiro include Pompeu Fabra University.


Papers
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TL;DR: In this article, the authors provide a model of competition among credit ratings Agencies (CRAs) in which there are three possible sources of conflicts: 1) the CRA conflict of interest of understating credit risk to attract more business; 2) the ability of issuers to purchase only the most favorable ratings; and 3) the trusting nature of some investor clienteles who may take ratings at face value.
Abstract: The collapse of so many AAA-rated structured finance products in 2007-2008 has brought renewed attention to the causes of ratings failures and the conflicts of interest in the Credit Ratings Industry. We provide a model of competition among Credit Ratings Agencies (CRAs) in which there are three possible sources of conflicts: 1) the CRA conflict of interest of understating credit risk to attract more business; 2) the ability of issuers to purchase only the most favorable ratings; and 3) the trusting nature of some investor clienteles who may take ratings at face value. We show that when combined, these give rise to three fundamental equilibrium distortions. First, competition among CRAs can reduce market efficiency, as competition facilitates ratings shopping by issuers. Second, CRAs are more prone to inflate ratings in boom times, when there are more trusting investors, and when the risks of failure which could damage CRA reputation are lower. Third, the industry practice of tranching of structured products distorts market efficiency as its role is to deceive trusting investors. We argue that regulatory intervention requiring: i) upfront payments for rating services (before CRAs propose a rating to the issuer), ii) mandatory disclosure of any rating produced by CRAs, and iii) oversight of ratings methodology can substantially mitigate ratings inflation and promote efficiency.

749 citations

Journal ArticleDOI
TL;DR: In this article, the authors model both the CRA con-tiction of understating credit risk to attract more business, and the issuer con-fection of purchasing only the most favorable ratings (issuer shopping), and examine the eectiveness of a number of proposed regulatory solutions of CRAs.
Abstract: The spectacular failure of top-rated structured …nance products has brought renewed attention to the con‡icts of interest of Credit Rating Agencies (CRAs). We model both the CRA con‡ict of understating credit risk to attract more business, and the issuer con‡ict of purchasing only the most favorable ratings (issuer shopping), and examine the eectiveness of a number of proposed regulatory solutions of CRAs. We …nd that CRAs are more prone to in‡ate ratings when there is a larger fraction of naive investors in the market who take ratings at face value, or when CRA expected reputation costs are lower. To the extent that in booms the fraction of naive investors is higher, and the reputation risk for CRAs of getting caught understating credit risk is lower, our model predicts that CRAs are more likely to understate credit risk in booms than in recessions. We also show that, due to issuer shopping, competition among CRAs in a duopoly is less e¢ cient (conditional on the same equilibrium CRA rating policy) than having a monopoly CRA, in terms of both total ex-ante surplus and investor surplus. Allowing tranching decreases total surplus further. We argue that regulatory intervention requiring upfront payments for rating services (before CRAs propose a rating to the issuer) combined with mandatory disclosure of any rating produced by CRAs can substantially mitigate the con‡icts of interest of both CRAs and issuers.

577 citations

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TL;DR: In this paper, the authors analyze a dynamic model of ratings where reputation is endogenous and the market environment may vary over time, and find that a CRA is more likely to issue less accurate ratings in boom times than during recessionary periods.
Abstract: The reduced accuracy of credit ratings on structured finance products in the boom just preceding the financial crisis has prompted investigation into the business of Credit Rating Agencies (CRAs). While CRAs have long held that their behavior is disciplined by reputational concerns, the value of reputation depends on economic fundamentals that vary over the business cycle. These include income from fees, default probabilities for the securities rated, competition in the labor market for analysts, and expectations about the future. We analyze a dynamic model of ratings where reputation is endogenous and the market environment may vary over time. We find that a CRA is more likely to issue less accurate ratings in boom times than during recessionary periods. Persistence in economic conditions can diminish our results, while mean reversion exacerbates them. Finally, we demonstrate that competition among CRAs yields similar qualitative results.

264 citations

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TL;DR: The authors explored the origins of excessive risk-taking in the banking industry and provided the analytical ammunition required to rigorously examine regulatory policy at a time when it is undergoing a complete metamorphosis.
Abstract: The current crisis and its high social cost have shattered the confidence of economic agents in the banking system and questioned the capacity of financial markets to channel resources to their best use. While it is essential for the well functioning of economic activity that financial institutions do take risk, the decisions taken by financial intermediaries have proven ex post to be excessively risky. So, what was wrong with financial regulation? How were overoptimistic expectations, short termism and inaccurate risk models implicitly encouraged? This book is devoted to exploring the general issue of the origins of excessive risk-taking in the banking industry. In doing so, it will provide the analytical ammunition required to rigorously examine regulatory policy at a time when it is undergoing a complete metamorphosis.

237 citations

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TL;DR: In this paper, a model of ratings incorporating endogenous reputation and a market environment that varies is presented, and the authors find that ratings quality is countercyclical. But, they also show that the presence of naive investors reduces overall quality and competition among CRAs yields similar results.

207 citations


Cited by
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Journal ArticleDOI
01 Feb 1980-Nature

1,368 citations

01 Feb 1951
TL;DR: The Board of Governors' Semiannual Agenda of Regulations for the period August 1, 1980 through February 1, 1981 as discussed by the authors provides information on those regulatory matters that the Board now has under consideration or anticipates considering over the next six months.
Abstract: Enclosed is a copy of the Board of Governors’ Semiannual Agenda of Regulations for the period August 1, 1980 through February 1, 1981. The Semiannual Agenda provides you with information on those regulatory matters that the Board now has under consideration or anticipates considering over the next six months, and is divided into three parts: (1) regulatory matters that the Board had considered during the previous six months on which final action has been taken; (2) regulatory matters that have been proposed for public comment and that require further Board consideration; and (3) regulatory matters that the Board may consider over the next six months.

1,236 citations

Journal ArticleDOI
TL;DR: The Limits of Organization as discussed by the authors is a seminal work in the field of economic analysis and policy making, focusing on the role of organization in economic decision-making, and its effect on economic outcomes.
Abstract: (1975). The Limits of Organization. Journal of Economic Issues: Vol. 9, No. 3, pp. 543-544.

1,138 citations

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TL;DR: The authors empirically examined how capital affects a bank's performance (survival and market share), and how this effect varies across banking crises, market crises, and normal times that occurred in the U.S over the past quarter century.
Abstract: This paper empirically examines how capital affects a bank’s performance (survival and market share), and how this effect varies across banking crises, market crises, and normal times that occurred in the U.S. over the past quarter century. We have two main results. First, capital helps small banks to increase their probability of survival and market share at all times (during banking crises, market crises, and normal times). Second, capital enhances the performance of medium and large banks primarily during banking crises. Additional tests explore channels through which capital generates the documented effects. Numerous robustness checks and additional tests are performed.

1,080 citations

Journal ArticleDOI
TL;DR: Shapiro and Varian as mentioned in this paper reviewed the book "Information Rules: A Strategic Guide to the Network Economy" by Carl Shapiro and Hal R. Varian and found that it is a good book to read.
Abstract: The article reviews the book “Information Rules: A Strategic Guide to the Network Economy,” by Carl Shapiro and Hal R. Varian.

1,029 citations